After a flurry of rumours, trade secretary Stephen Byers last week sprang his big surprise on the profession: regardless of previous undertakings, the government will now consider hiking the threshold for small company audits from the current £350,000.
Byers told the British Chambers of Commerce conference in Glasgow last week that he would start consultation on lifting the threshold, possibly up to the £4.2m maximum allowed under European company law directives.
‘Any change could potentially benefit thousands of companies,’ he said.
‘For example, lifting the threshold to £2m would lift the audit requirement from 150,000 companies.’ A company turning over £1m could save £5,000 a year, he added.
Gerry Acher, chairman of the English ICA’s audit faculty, was concerned the minister had made up his mind about levels even before the consultation process began. ‘I’m basically against easing regulation by just moving limits from one level to another,’ he said. ‘Byers assumes there is no value to the audit process. I disagree.’
There is an active debate within the audit faculty about how to measure the value of audits to companies and shareholders, Acher added.
The timing of Byers’ announcement was even more galling to accountants advising the trade department on company law reform. As recently as March, DTI discussion papers specifically excluded the audit threshold from debate and by bringing in proposals so late, Byers has effectively scrapped several months’ work.
‘We would have thought very differently about small company reporting if we knew that companies would be exempted from audits,’ said Warender Stewart partner Danielle Stewart. ‘We now have to go back to look at first principles.’
Stewart also challenged the £5,000 figure. ‘The total accounting costs for that type of company might be £5,000, but market forces have pushed the typical audit cost down to around £2,500,’ she said.
The government also stood to lose tax revenues from innocent accounting mistakes and deliberate fraud, she added.
Less innocent cases of tax evasion would also increase if directors knew they would not face an independent auditor, Stewart added. However any underpayments might occur, the government was effectively shifting the burden of paying from companies to taxpayers.
Cynics would expect auditors to fight for their livelihoods, but many accountants accept they could still prosper by offering advice beyond the scope of the traditional audit.
Grant Thornton’s head of client services Will Lifford said the threshold proposal was ‘a step in the right direction’, but was concerned about the prospect of costly tax investigations.
Baker Tilly partner Teresa Graham, a member of the government’s Better Regulation Task Force was even more forthright in her support for Byers.
‘I find it laughable that the profession can make a living from a statutory requirement,’ she said. ‘A lot of businesses who would be exempt will borrow from banks, which would consider it a prerequisite for a loan.
‘Auditors are always telling you how valuable the audit is – now they can prove it.’
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